6/08/2009

How to trade biotechs profitably

In recent market rally, the biotechs have seen some major moves. Many of the drugs and biotechs related stocks have seen 300% plus moves in compressed time frame. 
This has attracted lot of investors and traders to focus on them. The biotechs have a unique trading pattern. Understanding how a specific industry trades can provide you with an edge. Most of these stocks have no sales, no earnings and when the sector is in favor they make 100 plus moves in jiffy.

Biotechs is pure speculative game. One can make lot of money in it if one manages risk properly. Some of the things I have found over the years by trading biotechs
are:

  • Episodic Pivots are best to time entries in biotechs. Most biotech moves are precipitated by some news events.
  • The sector gets in favor and out of favor. Mostly these things are also linked to decision cycle by FDA. When sector is in favor the more speculative ones pop one after another.
  • One must buy the first breakout and on first day. It is pointless to buy second breakout. One must put full position at beginning itself. The rallies in these names are so compressed that in few days or week they make bulk of their move. So either you are in or you are a spectator.
  •  In most cases there is one intense 10 to 30 days burst followed by long sideways move, which invariably fails. It looks very attractive like a flat base and often has upside breakout which fails. I normally liquidate my position in 20 to 22 days in such plays.
  • Insider buying on biotechs is very good indicator.
  • Playing biotech is like playing lottery. There is very high risk.


If you want to really understand the sector and what happens behind the scene in biotech, I highly recommend the book :
From Alchemy to IPO by Cynthia Robbins- Roth


This book is by a former Genetech scientist. It will give you an excellent perspective on the entire biotech industry. It covers both the inner working of biotechs and the business side of it. 




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